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. Last Updated: 07/27/2016

Industry Shrugs Off Strengthened Ruble

Industrial output soared well above expectations in January, helped by unusually warm weather, according to data Friday that could help break down domestic resistance to the strengthening of the ruble.

Output rose 8.4 percent year on year, compared with a 3.8 percent median forecast by analysts in a monthly Reuters poll.

"It's a positive surprise to growth that should ease political opposition to a stronger ruble," said Rory MacFarquhar, analyst at Goldman Sachs.

The country's industrial lobby is trying to fight the Central Bank policy of using the ruble's nominal appreciation to curb price growth, saying a stronger ruble eats into exporters' profits.

The bank allowed the ruble to appreciate by 4.3 percent in 2006 against the dollar-euro basket it uses to guide its managed float of the currency. The bank said pressure for the ruble to appreciate would remain in 2007 due to large capital inflows.

Industrial output slowed to 3.9 percent in 2006 from 4 percent the previous year in what many analysts said reflected the impact of a strengthening currency. Gross domestic product rose 6.7 in 2006 due to booming construction and trade.

The figure was a disappointment for President Vladimir Putin, who has said he wants to promote industrial growth and that the country's top priority should be to diversify away from its dependence on sales of oil, gas and metals.

The Central Bank defends its appreciation policy by saying a stronger ruble gives domestic enterprises an opportunity to modernize, paying less for equipment produced abroad.

An impressive January number spoke in favor of the Central Bank's policy and was likely to temporarily silence its critics. Most analysts predict a 3 percent appreciation of the ruble against the dollar-euro basket in 2007. The bank earlier this month changed the composition of the basket, increasing the share of the euro to 45 percent in a move that it said should better reflect Russia's foreign trade structure.

Analysts said the increase in industrial output was a result of record high temperatures in January, which allowed builders and factories to carry on working without suffering the major power cuts they experienced last year.

"It is the result of very warm weather in January, which allowed builders to continue working. The weather factor played a big role here," said Yevgeny Nadorshin, analyst at Trust Bank.

Output was down 11.7 percent month on month. The monthly number is traditionally low in January due to the long New Year's and Orthodox Christmas holidays, which bring the country virtually to a standstill for the first 10 days of the month.

The construction industry along with trade is one of the drivers of the country's economic growth. Production of bricks and cement increased by 34 and 49 percent in year-on-year terms respectively, the data showed. Even the car industry, traditionally a laggard, showed a 25 percent output growth rate.

"Manufacturing is clearly responding to strong consumer demand and is showing no signs of deteriorating competitiveness," MacFarquhar said.